Focus shifts to Middle East's powerhouse - Saudi Arabia

15 December 2010

As Riyadh outlines its spending plans for the next decade, there will be huge opportunities for the private sector to increase its contribution to the economy

Key fact

The private sector is forecast to grow from 52.3 per cent of the economy in 2004 to 69.3 per cent in 2024

Source: NCB Capital

The regional head of one international law firm says that, despite the financial crisis, it is not arbitration, law suits or restructurings that are taking up all his time. Instead, he says, “All we are doing these days is helping companies set up in Saudi Arabia and get visas to go there.”

The challenges facing the kingdom mean … significant progress will have to be made to avoid a worrying confluence of events

This marks a radical shift in priorities for businesses in the region. When Dubai’s construction boom was at its peak, the UAE became the regional leader in terms of projects mooted for development, and its banking sector grew to be the biggest based on total assets – despite the country’s smaller population size and economy.

Massive interest in Saudi Arabia from businesses

With one of the biggest populations in the Gulf, the largest proven oil reserves in the world and a desperate need for infrastructure development, Saudi Arabia’s potential is immense. As it tiptoes towards reform and opens up its economy to international investors, the kingdom is attracting huge interest from global businesses.

Saudi Arabia is not a country with a reputation for rapid change, but the challenges facing the kingdom now mean that, over the next decade, significant progress will have to be made to avoid a worrying confluence of events.

During the next 10 years, Saudi Arabia’s population will continue to expand, putting pressure on the state to liberalise the economy and create more jobs; it will increasingly use its oil resources for internal purposes, diminishing its oil income; and a new generation of leaders will come to the fore and have to address these pressures.

The government will have to look at the sustainability of high spending beyond 2013

John Sfakianakis, Banque Saudi Fransi

In 2011, the total population of the kingdom is expected to be about 27.7 million, with about 8.6 million non-Saudis resident in the country, and an unemployment rate among locals of 10.6 per cent. The Planning Ministry said in mid-2010 that, by 2020, the population would hit 33.5 million, of which 29.7 million will be Saudi nationals and 3.8 million expatriates.

To address these challenges, Riyadh has set out a long-term development path that extends until 2024. It wants to double per capita income at constant prices from SR43,300 ($11,545) at the end of 2004, to SR98,500 at the end of 2024. That will require an average annual growth in gross domestic product (GDP) of 6.6 per cent.

Despite its growth forecasts, reaching those levels will not be easy. The local NCB Capital is forecasting that growth in 2011 and 2012 will be 4.3 per cent and 4.4 per cent respectively.

The development plan is broken up into several five-year plans and the latest, for 2010-14, calls for average real GDP growth of 5.2 per cent a year and the unemployment rate to be halved to 5.5 per cent. The private sector will be expected to grow from 52.3 per cent of the economy in 2004 to 69.3 per cent in 2024 – an annual growth rate of 8.1 per cent. As a result, the oil sector will shrink from 27.5 per cent of total GDP to 17.9 per cent in 2024.

Energy demand in Saudi Arabia

In the meantime, oil will continue to provide the liquidity necessary for the kingdom’s investment drive. The 2010-14 development plan envisages investing SR1,444.6bn in the continued build out of infrastructure and development projects.

Oil cannot play this role in the long term though. The head of Aramco said in April 2010 that domestic energy demand is expected to rise from 3.4 million barrels a day (b/d) of oil equivalent to 8.3 million b/d of oil equivalent by 2028. That will leave about 7 million b/d for export.

At the same time, Saudi Arabia’s investment drive has led to the budget’s breakeven oil price rising steadily over recent years. In 2011, the breakeven price is expected to be about $75 a barrel, according to the local Banque Saudi Fransi. Recent years have seen the government habitually overspend on its budget. “Such overspending is not sustainable over the long term,” says John Sfakianakis, chief economist at Banque Saudi Fransi. “The government will have to look at the sustainability of high spending beyond 2013.”

At that point, the private sector will have to become the engine of growth. Efforts are already well under way to grow the size of the private sector.

In 2000, the Saudi Arabian General Investment Authority (Sagia) was established to draw international companies to the kingdom and after conducting studies of more than 1,000 free zones globally, it announced plans to establish four economic cities to act as hubs for investors across all sectors.

In 2007, Sagia set itself the target of making the kingdom rank among the top 10 most competitive nations by 2010. Although Saudi Arabia only achieved eleventh position in the World Bank’s Doing Business report for 2010, Sagia has nonetheless succeeded in cutting away much of the bureaucracy that had previously deterred companies from setting up in the country. The kingdom ranks highest among all Middle Eastern countries in the competitive index.

Efforts are also being directed at developing the local private sector, with increasing support to give to young entrepreneurs.

Investment boom in Saudi Arabia

As the private sector expands, and new sectors of the economy are opened up, the government hopes that more jobs for Saudis will be created.

Some new areas of the economy will receive considerable investment, including the continued development of the oil and petrochemicals industry and the mining industry, through a new mining law opening the way for private-sector companies to invest in developing non-hydrocarbon natural resources.

There are also plans to start using public-private partnerships (PPP) to more rapidly develop infrastructure, including the Medina airport project, which could be the beginning of a long pipeline of transport PPP schemes in the country.

With such ambitious plans, Saudi Arabia is set to become the major focus in the years ahead for international firms looking to win business in the region, in place of Dubai and the wider UAE, which led regional growth in the pre-credit crunch years.

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